Stock Analysis

These 4 Measures Indicate That La Française des Jeux Société anonyme (EPA:FDJ) Is Using Debt Safely

ENXTPA:FDJ
Source: Shutterstock

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, La Française des Jeux Société anonyme (EPA:FDJ) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for La Française des Jeux Société anonyme

What Is La Française des Jeux Société anonyme's Net Debt?

The image below, which you can click on for greater detail, shows that La Française des Jeux Société anonyme had debt of €430.8m at the end of December 2022, a reduction from €489.9m over a year. However, it does have €720.4m in cash offsetting this, leading to net cash of €289.6m.

debt-equity-history-analysis
ENXTPA:FDJ Debt to Equity History March 31st 2023

A Look At La Française des Jeux Société anonyme's Liabilities

According to the last reported balance sheet, La Française des Jeux Société anonyme had liabilities of €1.87b due within 12 months, and liabilities of €521.3m due beyond 12 months. On the other hand, it had cash of €720.4m and €725.4m worth of receivables due within a year. So it has liabilities totalling €944.5m more than its cash and near-term receivables, combined.

Given La Française des Jeux Société anonyme has a market capitalization of €7.31b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, La Française des Jeux Société anonyme also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that La Française des Jeux Société anonyme grew its EBIT at 17% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if La Française des Jeux Société anonyme can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While La Française des Jeux Société anonyme has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, La Française des Jeux Société anonyme generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While La Française des Jeux Société anonyme does have more liabilities than liquid assets, it also has net cash of €289.6m. And it impressed us with free cash flow of €302m, being 90% of its EBIT. So is La Française des Jeux Société anonyme's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for La Française des Jeux Société anonyme that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

About ENXTPA:FDJ

La Française des Jeux Société anonyme

Engages in the gaming operation and distribution business in France and internationally.

Outstanding track record and undervalued.

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